Upgrading and Transformation: Escape from LED Structural Overcapacity Pressure

Upgrading
and Transformation: Escape from LED Structural Overcapacity Pressure

By
SEMI China

After experiencing a boon in 2010, the weak
LED market reaction in 2011 did not allow the global LED manufacturing
production to grow as expected. Capacity utilization reached a low due to the
fast capacity expansion and slower market demand, and this triggered a fall in
prices of LED chips, equipment and materials. Compared with the substantial
growth in 2010, the output of global LED manufacturing industry merely saw a
slight rise of less than 5 percent in 2011.

Although
the LED backlight and lighting markets did not grow to expectations in 2011 and
the outside world worried about the slowing demand for MOCVD equipment, China’s
MOCVD tool installations continued
to grow at a rapid pace. Increased volume of China’s MOCVD installation ranked
first globally, and occupied over 50 percent of the total global volume in 2011. According to estimates by SEMI China, in
2010-2012 China saw the actual monthly output of LED gallium nitride epitaxial chips
grow 300 percent to around 1.3 million chips (based on 2 inches wafers).

Figure 1: MOCVD Shipment by Region 2011

Source: SEMI China, 2012

In 2011, the global LED
manufacturing industry was pressured by overcapacity and pricing, and this
market pressure was particularly high for local Chinese LED manufacturers. While
focusing on middle- and low-end application markets, local Chinese LED
epitaxial chips manufacturers faced extraordinarily fierce competition on pricing and many were confronted with falling fab utilization and high
inventories. With declining fab utilization and challenging price environment, many local Chinese LED epitaxial chips manufacturers suffered.
In contrast, leading international LED manufacturers were able to maintain
continuous growth, with gross margins of 30 to 40 percent.

In
China, most new LED epitaxial and chip projects focus on the Gallium Nitride
blue-green LEDs, with a majority of the capacity currently targeting the
crowded medium and small die-sized LED applications. The LED products in China that require large die-size and
high-power LED chips with high luminous efficacy for the high-end lighting
field rely on imports as domestic manufacturers occupy only a small market
share for these applications.

If the Chinese LED upstream
manufacturers only target products with low technological requirements and fail
to enter the general lighting market, the issue of overcapacity in the Chinese
LED manufacturing industry will only
deteriorate. Many Chinese local LED manufacturers, however, realize
that technological innovation, product transformation, and manufacturing upgrades
are their best option for future growth; these manufacturers have increased
their efforts to develop new technologies and many have made significant progress.

From Common
Sapphire Substrate to PSS, the “Leap Forward” of the Chinese Sapphire Substrate
Industry

In 2010, the production expansion of the
global LED manufacturing industry resulted in a growing demand for sapphire substrates,
followed by a rise in sapphire substrate prices. The price of the common 2-inch
sapphire substrates, for example, rose from $8 in thefourth quarter
of 2009 to $35 one year later. This vast increase drew considerable attention
to the relatively calm sapphire substrate field.

Figure
3: 2 inch Sapphire Substrate Price Trend

Source: SEMI China
(compiled from company data and press releases)

Driven by the fast growing LED epitaxy capacities in China, investment activity quickly spread upstream to the sapphire substrate market. More and
more Chinese enterprises are starting to engage in manufacturing of sapphire ingots and substrates. In 2011, over 20 new sapphire
ingot and substrate projects began production and
work; the majority of investments were privately funded; however, many domestic
sapphire substrate manufacturers did not expect the softening of the global LED
manufacturing industry in 2011. This market downturn led to a steep fall sapphire
substrate for substrate pricing. The price of 2-inch sapphire substrates plunged back to its previous low of $8 from its high of
$35.

While the Chinese local sapphire substrate
manufacturing industry faced severe pricing pressures as they invested in
capacity, domestic LED epitaxial chips
manufacturers quickly began to introduce PSS (Patterned Sapphire Substrate) to
improve the luminance of LED chips. This situation resulted in a disconnect
between some sapphire substrate manufacturers and LED epitaxy customers.
A number of sapphire suppliers had to
make new investments for PSS processing to keep up with customer requirement, while
failing to profit from initial investments to
produce flat sapphire substrate.

Undeniably, the Chinese LED manufacturing industry has entered a transformation
period, and the situation gives way to larger growth opportunities going
forward. Sapphire substrate, LED epitaxial chip, and LED packaging
manufacturers in China will need to adapt to the transformation or struggle to
remain relevant players in the market. Companies that will move forward will have
to adopt newer, more efficient technologies and equipment so they can produce higher quality products with better yields
and lower costs. In
doing so, this companies can gain
market share and initiative for future growth. Without this transformation, the
market will eradicate number Chinese LED manufacturing companies within three
years. This industry change also creates many market opportunities for material
and equipment suppliers with innovative solutions.

SEMI China has devoted itself to creating an
industry platform that promotes the advancement and growth of the Chinese LED
manufacturing industry. The SEMI China LED Committee, SEMI LED industry standards,
SEMICON China LED Pavilion, and the world-class LED technology conference – LED
China Forum – are dedicated to advancing the Chinese LED manufacturing
industry.

As the only LED exhibition dedicated to LED manufacturing in
China, the SEMICON China LED Pavilion is widely recognized in the industry for showcasing
the latest manufacturing technologies, new process equipment and material
integration solutions in the global LED manufacturing industry. SEMICON China
2012 LED attendees included China’s top 15 LED epitaxy and chip manufacturers,
and numerous local Chinese and overseas manufacturers in LED substrate,
epitaxy, chip, packaging and processing equipment materials fields.

The LED China Forum 2012 held in March
showcased the most advanced LED technologies to the Chinese LED manufacturing
industry. Some leading edge technologies, including Professor Shuji Nakamura’s
polarized LED technology, Bridgelux’s latest 8-inch silicon substrate LED
results, and U.S. QD Vision’s quantum dot LED technology were presented during
the Forum. Executives of leading enterprises such as CREE and M-TECH, who share
the LED application market and technology development trends, helped make this
forum the best platform through which the Chinese LED manufacturing industry
can understand and exchange the world’s newest LED technologies and market
development trends.